How To Convert a Traditional IRA to a Roth IRA: A Step-by-Step Guide

Learn what a Roth conversion is, who it can help most and how to make the switch without tax surprises.

Converting a traditional IRA to a Roth IRA can reshape your long-term retirement plan, especially if you want more control over how your future income gets taxed. A Roth conversion sets you up for tax-free withdrawals down the road, but it isn't a casual flip of a switch. The move comes with rules, timing quirks and tax consequences you'll want to understand before pulling the trigger.

This guide breaks down what to weigh, how the switch can work in your favor, and the steps involved so you can make a smart and well-timed decision.

Understanding the Basics

When you're deciding whether switching retirement plans may be appropriate, it helps to understand how traditional IRAs and Roth IRAs differ.

A traditional IRA allows you to delay paying income tax on your contributions and investment growth until you take money out later (such as in retirement). A Roth IRA requires you to pay income tax on your contributions up front, which means qualified withdrawals in retirement are tax-free.

Here are some of the key differences to consider:

Both traditional and Roth IRAs have yearly contribution limits and may impose penalties if you take money out before age 59 1/2, unless an exception applies.

Why Convert a Traditional IRA to a Roth IRA?

A Roth conversion can offer meaningful benefits, depending on your financial goals and tax situation. Here are a few key reasons investors may consider moving funds from a traditional IRA to a Roth IRA:

• Tax timing: You may prefer to pay taxes on the converted amount now and potentially benefit from tax-free qualified withdrawals in retirement if IRS requirements are met.


• Avoiding RMDs: Roth IRAs have no required minimum distributions during your lifetime, which can give you more control over how and when you use your savings.


• Expecting a higher future tax bracket: If you believe your tax rate may be higher later, converting today could reduce your lifetime tax bill.


• Estate planning benefits: Beneficiaries can inherit Roth IRA assets that may be withdrawn tax-free. For traditional IRAs, beneficiaries may be subject to RMDs.

Who Should Consider a Roth IRA Conversion?

A Roth IRA conversion may be worth considering if one or more of the following situations apply to you:

• You can comfortably pay the taxes on the converted amount: Because the amount you convert is treated as taxable income, it's helpful if you can cover the tax bill without reducing your retirement savings.


• You're in a lower tax bracket now than you expect to be in the future: Converting when your tax rate is relatively low may reduce the total taxes you pay in your lifetime.


• You have many years until retirement: A longer time horizon gives the converted funds more time to potentially grow tax-free in a Roth IRA if IRS requirements are met.


• You want to avoid RMDs: Roth IRAs don't require RMDs during your lifetime, which can offer more flexibility in managing withdrawals.


• You expect your income to affect Roth contribution rules: While conversions have no income limit, Roth contributions do. If you anticipate staying within the contribution limits, holding Roth assets may fit your long-term savings approach.

These situations don't guarantee that a conversion is the best choice, but they can be signs that the potential benefits may outweigh the costs, depending on your overall tax and financial picture.

When To Convert Your Traditional IRA to a Roth IRA

If you've decided that a Roth IRA conversion may be appropriate for your situation, timing can play an important role in how much tax you end up paying. Here are a few factors to consider:

• Market conditions: Converting when the stock market is down may result in a lower tax bill because the value of the assets being converted is temporarily lower.


• Your total income for the year: A conversion increases your taxable income. If your overall income is lower in a particular year, the tax impact of the conversion may also be lower. This can happen during periods such as a job transition or reduced work hours.


• Partial vs. full conversions: You don't have to convert your entire traditional IRA at once. Some investors may choose to spread conversions over multiple years to manage the impact on their tax bracket.

The Tax Implications of a Roth Conversion

A Roth IRA conversion can offer long-term tax advantages, but it also creates an immediate tax obligation. Understanding how the IRS treats conversions can help you avoid unpleasant surprises. Here are the key tax considerations:

• Conversion tax: The amount you convert is treated as ordinary income in the year of conversion. It's often helpful to have non-retirement funds available to cover the tax so you don't reduce your savings in the process.


• Higher tax bracket: A large conversion can push your total income into a higher tax bracket for that year. If that's a concern, spreading conversions over several years may help you manage the impact.


• Impact on income-based programs: A higher income for the year may influence eligibility for certain programs, such as ACA premium tax credits or college financial aid. Be aware that a conversion could increase your income beyond a key threshold.


• The five-year rule: Converted amounts generally need to stay in the Roth IRA for five years to avoid a 10% penalty if you withdraw them before age 59 1/2.

Step-by-Step Guide to Converting a Traditional IRA to a Roth IRA

If you've reviewed the pros and cons and decided that a Roth conversion may fit your financial goals, the steps below can help you move through the process with fewer surprises.

Step 1. Evaluate your current IRA balances and tax situation

Start by reviewing your traditional IRA balance and estimating the tax impact of converting. Consider the long-term benefits and trade-offs discussed earlier. This can help you decide whether a full or partial conversion may be appropriate.

Step 2. Consult with a financial advisor or tax professional

Before you move forward, check in with a financial advisor or tax professional. Conversion rules can change, state taxes may apply and your overall financial picture may involve factors that aren't obvious. An expert can help you avoid expensive mistakes.

Step 3. Open a Roth IRA if you don't already have one

If you don't already have a Roth IRA, open one at your preferred bank, brokerage or financial institution. If your traditional IRA provider offers Roth IRAs, staying with the same institution may simplify the transfer.

Step 4. Initiate the conversion through your IRA provider

Contact your IRA provider to start the conversion. You should already know how much you plan to convert and whether you'll do it all at once or in stages over several years.

Step 5. Choose between a direct transfer or a 60-day rollover

There are two main ways to transfer money from a traditional IRA to a Roth IRA.

• Direct transfer: Your traditional IRA provider sends the funds directly to your Roth IRA. If the accounts are at different institutions, you may receive a check made payable to the Roth IRA provider, not to you.


• 60-day rollover: You receive funds and must deposit them into your Roth IRA within 60 days. Missing the deadline can turn the amount into a taxable distribution and may also trigger a 10% penalty if you're under 59 1/2.

A financial advisor can help you determine which method fits your situation.

Step 6. Keep detailed records and track your tax forms

Keep documentation related to your conversion. Your financial institution will issue a Form 1099-R showing the amount converted. You or your tax preparer will report the conversion on Form 8606 and include the taxable amount on your Form 1040. Careful recordkeeping can help you avoid errors at tax time.

Step 7. Plan for the tax payment on the conversion amount

After the conversion is complete, prepare for the tax that may be due. Knowing the amount converted and how it affects your tax bracket can help you plan ahead. Consider adjusting your savings or spending so you can cover the tax bill when it comes due.

Common Mistakes To Avoid During Conversion

Avoiding common errors can help make your conversion smoother, and a financial advisor can help you stay on track.

• Underestimating the tax impact: The converted amount counts as taxable income. If you don't plan for how it affects your tax bracket, you may owe more than expected.


• Using converted funds to pay taxes: Paying the tax bill directly from your IRA reduces your retirement savings and may trigger penalties, depending on your age.


• Converting everything at once without a strategy: Decide in advance whether it makes sense to convert your entire balance at once or spread it over several years to help manage your taxable income.


• Failing to report the conversion correctly: Incorrect reporting can lead to IRS penalties or an unexpected tax bill. Use the proper forms or work with a tax professional to help ensure accuracy.

Frequently Asked Questions

Still have questions about converting a traditional IRA to a Roth IRA? Here are answers to some of the most common concerns.

Can I convert just a portion of my traditional IRA?

Yes. You can choose to convert only part of your traditional IRA to help manage the taxable income created by the conversion.

What happens if I convert and then the market goes down?

Unfortunately, losses inside a Roth IRA generally aren't tax-deductible. There are very limited situations where a deduction may be possible, but they require closing the entire Roth IRA and itemizing deductions, which doesn't apply to most investors. A tax professional can help you understand whether any exceptions may apply.

Are conversions reversible?

No. Since 2018, conversions from a traditional IRA to a Roth IRA cannot be reversed. Before that rule change, investors could “recharacterize" a conversion within a limited window, but this option is no longer available.

How soon can I withdraw converted funds penalty-free?

Converted amounts need to stay in the Roth IRA for five years to avoid the 10% penalty if you are under age 59 1/2. Withdrawals of earnings may also be subject to separate IRS rules. Understanding how contributions, conversions and earnings are treated can help you avoid unexpected taxes or penalties.

Is a Roth Conversion Right for You?

Converting a traditional IRA to a Roth IRA can offer meaningful long-term advantages, such as the potential for tax-free qualified withdrawals and more flexibility when managing your retirement income. But it also creates a tax impact in the year you convert.

Before moving forward, take time to weigh the pros and cons and think about how the timing fits your overall financial picture. A financial advisor or tax professional can help you evaluate the decision based on your individual circumstances.

Want to explore your options? Check out Synchrony's current product rates for IRA CDs and IRA MMAs and see what works for your savings strategy. You can learn more about how to accurately calculate your retirement savings here.